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5 Option Trading Strategies You Should Know

Published : July 8, 2021

Most of the traders, especially the ones new to trading, jump directly into option trading without understanding the various strategies available to them.

Many option trading strategies, when cautiously put to use, can help in both minimizing the risk and maximizing the returns. Traders can carefully use the flexibility and power of trading in stock options to maximize their profits.

Here are some less know option trading strategies that every trader entering the world of trading in options should be aware of.

5 Must Learn Option Trading Strategies

Covered Call Option Trading Strategy

Covered Call is a popular options strategy used by veteran traders for minimizing the risks and limiting the losses. In a covered call strategy, a trader holds a long position in the underlying asset and selling a call option on the underlying asset. By selling a call option the options trader locks in the price of the asset ensuring a short-term profit for himself.

A covered call strategy ensures a guaranteed income for the investor in the form of the premium earned from the sale of the contract. The main advantage offered by the covered call option trading strategy is that traders are not required to time the purchase of the stock and the sale of the call option contract. However, it is advised by experts not to use this strategy if one expects an appreciation in the underlying asset’s price.

Married Put Option Trading Strategy

Married Put is an options trading strategy wherein a trader buys an ATM (at-the-money) put option along with buying an equivalent number of shares of the underlying asset. The ATM Put Option is purchased by the trader to protect against the depreciation in the stock’s price.

The main advantage offered by the married put strategy is to ensure that the trader loses only a small amount of money on the stock even in the worst of scenarios. The downside of the married put option strategy is that the put option in this strategy costs a premium which usually happens to be a significant amount.

The Long Straddle Option Strategy

The Long Straddle Option Trading Strategy is one of the simplest market-neutral strategies undertaken by traders to ensure that the profitability of the asset does not depend on the market movements. When the long straddle strategy is implemented it ensures that the profit and loss are not affected by the market movement.

To implement a long straddle strategy a trader has to buy a call option and a put option. The catch here is that both the buy and the call options belong to the same underlying asset, belong to the same expiry, and have the same strike price.

A long straddle strategy is not affected by small market moves as both the call and put options cancel out the small moves. Thus, a long straddle strategy is used to profit from very strong market moves triggered by some major newsworthy event.

The Long Strangle Option Trading Strategy

After understanding the long straddle strategy, understanding the long strangle strategy becomes straightforward to understand. Unlike the long straddle, in the long strangle strategy a trader is required to buy OTM call and put options. Thus, in a long strangle strategy an investor holds a long position in out-of-the-money call and out-of-the-money put option for the same underlying asset.

However, both the options are held for the same expiration date but after different strike prices. In case the market turns volatile, the investor is likely to profit from the movements in the strike prices.

Iron Condor Option Strategy

The iron condor is an options trading strategy wherein an options trader combines both a Bull Put Spread and a Bear Call Spread. This is done by the trader to generate profit. To construct an iron condor option strategy a trader needs four options with the same expiration date. These four options include, OTM put sell, OTM call sells, buy further an OTM put, and buy further an OTM call.

Iron condor strategy is suitable for experienced traders and works best in the scenario of expecting low volatility. This allows you to make a profit on the trade. The sweet spot of this strategy lies between the two inner strike prices.

Final Note

SEBI-regulated option trading is one of the most exciting areas of the investing world as it holds the potential of generating huge gains. But, to succeed a trader needs to put option strategies to work. A trader needs to know which strategy best suits a particular situation and what risks and rewards are associated with it. Option strategies are based on the two fundamental options: call put option. A range of strategies can be created using these basics for maximizing profits and limiting the risk involved.

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